Question

Jacoby purchases a home for $1,500,000 by making a $300,000 down payment and by borrowing the remaining $1,200,000 with a loan secured by the home. He subsequently obtained an additional $100,000 loan secured by the home. Jacoby can deduct interest expense on $1,100,000 of the loan principal?

Answer 1

Yes, Jacoby can deduct interest expense on $1,100,000 of the loan principal.

Step-by-step explanation:

Jacoby can deduct interest on the portion of the loan used for qualified purposes, such as acquiring or improving the home.

In this case, the initial loan of $1,200,000 and the additional loan of $100,000 both qualify.

However, the down payment of $300,000 is not part of the loan principal eligible for interest deduction.

Therefore, the total eligible loan principal for interest deduction is $1,200,000 (initial loan) + $100,000 (additional loan) = $1,300,000. Jacoby can deduct interest on this amount.

The down payment does not affect the deductible interest amount but contributes to the overall financing of the home.

It's crucial for individuals to keep track of how they use borrowed funds, as interest deductions are subject to specific rules and limitations.

In this scenario, the $1,100,000 figure represents the portion of the loan used for qualifying purposes, making it eligible for interest deduction on Jacoby's tax returns.